Educational Articles

Using a Value Line Report: Boeing - Cloudy Skies and Bad Dreams

Simon Shoucair
| January 25, 2013

Commercial aircraft manufacturing behemoth, Boeing Co. (BA – Free Boeing Stock Report), could be described as the quintessential blue chip company with a long legacy of considerable market share, as well as generating solid profits and capital gains. A quick look at the historical financial data in the Statistical Array shows that, while it has been a bumpy road, the company’s overall earnings and dividend growth has been strong. Furthermore, over the past thirty years the stock price has fared well, in spite of some considerable setbacks, including the events of 9/11, which shattered the airline industry, as well as the onset of the most severe financial crisis since the Great Depression. Indeed, long-standing investors have seen the stock quintuple in the aforementioned span, which is a more-than respectable return for an industrial manufacturing company. Scanning down to the Financial Strength box reveals further evidence to support this assertion, as the equity’s ratings for Price Stability and Price Growth Persistence are in the top quartile of the Value Line range. However, recent headwinds have undoubtedly raised concerns over whether BA shares will ever surpass the all-time high it achieved in 2007, on the cusp of the latest recession.

Boeing has been hard-pressed to navigate the increasing turbulence of late, the lion’s share of which is related to its increasingly woebegone Dreamliner 787 program. The media has been abuzz with detractive commentary about the slew of mechanical mishaps that have beleaguered what was to be Boeing’s paramount ‘best-in-class’ achievement and first catalytic contribution to commercial aircraft industry innovation in the 21st century.

Previously dubbed the “iPhone” of the air, Boeing’s Dreamliner was an offshoot of the company’s Sonic Cruiser project, which was developed to compete with the Anglo-French Concorde (now discontinued). The original program was scrapped due to heightened security and cost concerns following the tragedy of 9/11. Rather than eliminate the venture altogether, the program was transitioned into the development of the Dreamliner. The aircraft’s carbon-fiber structure, advanced digitally-enhanced electronics systems, and cutting edge ergonomic interior design, initially made it something of a modern marvel. These characteristics, coupled with its unparalleled fuel efficiency and low-maintenance demands, were supposed to set the bar higher for commercial aviation, continuing Boeing’s (and America’s) legacy of leading aerospace innovation.

However, the initial market rollout, originally set for the summer of 2008, was plagued by delays related to seemingly endless mechanical failures and computer malfunctions, which have continued to besiege these aircraft even after officially going into service in late 2011. Many in the airline industry, the financial services arena and the mainstream media blame micro-scrutiny of Boeing’s earnings performance, accompanied by management’s inhibiting concerns over cost efficiency and risk aversion, for the laundry list of troubles that have undermined the Dreamliner project from the outset.

Fingerpointing aside, the recent grounding of the fleet by the Federal Aviation Adminstration (or FAA) has added to the already substantial financial toll that the company stands to bear if these problems are not resolved once and for all. Mounting flight cancellations by Boeing’s largest 787 customers, including All Nippon Airways, Japan Airlines, and United Continental Holdings (UAL), will prove immensely costly. Although United has publicly backed Boeing, stating it remains intent on taking delivery of more 787s as they become available, Boeing will assuredly be expected to share the burden of the losses these companies are likely to incur. Moreover, given the complexity of the electronics at the core of the aircraft’s design, often compared to that of computers and cell phones, which are known to ‘crash’ for no apparent reason, the yet-incalculable cost of pinpointing the root of recent malfunctions and fixing them will probably be significant. That, combined with the expense of compensating disgruntled customers and the deficit for producing the Dreamliner itself, puts consensus estimated losses associated with this program in the billions.

Nonetheless, analyst Ian Gendler remains optimistic about Boeing’s financial condition and potential. In the Analyst Commentary Mr. Gendler states, “We continue to like the company’s near- and long-term growth prospects.” He surmises that the company’s sizable backlog, coupled with the likelihood of incremental increases in passenger air travel over the next few years, will probably offset ongoing challenges related to federal defense spending cuts, among other concerns. Furthermore, Mr. Gendler states that despite the stock’s untimely ranking, which can be found in the Ranks box, BA shares offer “worthwhile total-return potential” for patient investors. Indeed, Boeing’s solid cash reserves and top-notch Financial Strength rating of A++ suggest that the company will weather this current storm and continue to increase revenue and profits over the long haul. Moreover, it appears that investors share this notion, for the time being, as the stock price has not declined substantially on the heels of the recent FAA decision.

At the time that this article’s writing, the author did not have positions in any of the companies mentioned.